The pound euro exchange rate rallied on Thursday. The euro weakened sharply following the European Central Bank monetary policy announcement. The pair rallied to a high of €1.1712. This is the highest level that the pound has traded at versus the euro in a week.

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute. If the euro amount increases in this pairing, it’s positive for the pound. Or, if you were looking at it the other way around:1 EUR = 0.87271 GBP In this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.

The pound was broadly under pressure, although it traded higher versus the euro. Brexit nerves were weighing on demand for the pound. Investors are starting to look towards the Brexit votes in Parliament next week.

Evidence is showing that UK Prime Minister Theresa May has failed to break the Brexit impasse over the Irish backstop arrangement. Officials from both sides, the EU and the UK are pessimistic about a Brexit breakthrough with just a few days to go.

Brexit hardliners, who had appeared to be softening their stance over recent weeks, have once again hardened their resolve. With just a few days to go before the March 12th meaningful vote, there is still time for positions to shift. However, it is very unlikely that Theresa May will get the figures that she needs, without more help from Brussels.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

With no UK data due to be released, Brexit will remain the central focus today.

Draghi Crushes The Euro

The euro dropped sharply lower in the previous session. As analysts predicted, the ECB voted to keep interest rates on hold. However, the central bank lowered inflation forecasts for this year and next and growth forecasts. The weaker growth outlook comes after eurozone data continue to be weak.

ECB President Draghi said that risks were tilting to the downside and also advised that the ECB would not be raising interest rates until 2020. Additionally, the central bank surprise investors by launching fresh cheap loans programme for banks, just three months after ending the bond buying programme. Economists consider this to be a step towards loosening monetary policy rather than tightening. As investors pushed back their interest rate rise expectations, the euro fell lower.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

Today investors will be looking at German factory orders. Orders declined by 7% in December. Analysts are expecting an improvement in January with a decline of 3%. A weak reading would highlight the struggles of the German economy in the face of Brexit and a slowing global economy.

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.

This article was initially published on from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.